Friday, March 14, 2008

Are SEZs a good thing?

You have heard the slogans about the Indian Dream and India Shining. Most Disney movies talk about how you can become anything you want to be and how you can always realize your dreams. News media covers the stock market extensively, even though only 2% of the Indian population invest in stocks. We are told that our airports need to be privatized and maintained sleek - even though 98% of Indians do not use airports; nobody talks about the busstands and train stations that they do use. The Indian middle class welcomes Special Economic Zones (SEZs). It welcomes so called labor reform with hire and fire policies. It opposes trade unions actively.

There is a connecting thread between all of this - and it is a phenomenon that happens in the USA also. Thomas Frank covered this in his 2004 book "What is the Matter with Kansas?".

The United States state of Kansas was at one point (during the last century) a hot bed of left wing activism. Some of the earliest war protests and populism originated there. Yet,
worsening economic conditions on the Midwestern plains have only driven voters further to the right, into grass-roots antiabortion activism, campaigns against the teaching of evolution, obsessions with cultural indecency and other largely symbolic crusades


Michael Moore talks about this phenomenon in his book "Dude, Where's My Country?". Middle and poor voters should normally vote for increased taxes, improved labor standards, support trade unions and so on because these measures align with their class interests. For example, it is obvious for some time now that the IT and BPO industry employees need "collective bargaining" - that is, the right to organize as a union. Yet the normal industry employee opposes unions. So does their family.
That is, the middle class in India is acting against its own class interests - the question is why?

That ties in with the book I mentioned above about Kansas and the Disney movies.

The reason why the middle class is vocal for improving airports, is against trade unions and why the news media covers the stock market so much is this: our middle class believe that they are going to become rich business owners at any point soon. This is the myth that has been created by our government and media even though unemployment is now standing at 8%.
Let us take the case of Special Economic Zones - every state capital is vying to create these as a silver bullet for "creating wealth". Whenever someone protests the SEZs they are dubbed anti-development. Suddenly the intelligentsia are all about GDP-based development. But there is hardly any analysis of what the SEZs actually mean? Who do they benefit?

Special Economic Zones
A special economic zone is created out of apparently barren land and handed over to developers at a cheap cost. Companies that open there do not get any tax on their dollar exports. To be part of an SEZ you have to be a new entity - you cannot move older contracts into the SEZ.
Sounds like a good deal for business owners. We have all been hearing about how business has to be simulated by tax cuts.

But there is a hidden cost to SEZs. There is a reason that taxes exist. Just to maintain transport infrastructure along the SEZs, governments pay considerable amount of money. The company does not pay taxes - so where does the money come from?
Correct - it comes from OTHER tax payers. That is, people like you and me. Where do the benefits go to? To a set of business owners.
Thus SEZs transfer money from average people to business owners.

The idea is that business owners then can competitively succeed and that they will bring more jobs in. Thus the community - kind of - benefits by giving the business owner a break.
The truth is that nobody has really measured this and determined that the tax sacrificed and the hidden cost to the community is worth bearing for later benefits from the business. It is just assumed. And that is the problem.

For the last 15 years we are set upon a development model about which there is very little debate atleast in policy making circles. Let us consider what our development model is.

The Indian Development Model

1. Provide tax benefits to business owners
2. Encourage foreign investment by dismantling certain environmental and labor standards.
3. This will result in more jobs.
4. More money to spend for consumers.
5. Trickles down to poor people and lower middle class.
6. Wealth has been created!!

This is the model and most people reading this will probably have no problems with it. It is likely we consider this the only possible model to attain Western standards. This model depends on tax cuts and making rich people richer - the exact policies that Bush has been following in the United States for the last 8 years amid much revulsion and a 25% approval rating. Those policies have been denounced repeatedly in the USA - yet there is hardly any debate in India.
The reason why there is very little debate about SEZs and the principle they are founded upon (other than debate on land grabbing) - is because that is how the media and policy makers would prefer it to be. Those who challenge this model are not simply against the chosen model - they are against development itself!
Thus a policy that actually takes money from tax payers and transfers it to business owners is never debated in India! We blame the government all the time for misusing tax funds - yet no voice is raised against the SEZs.
My point is that there is no substantive debate - the same "meritocrats" who rail against reservation do NOT seem to be interested in proving how the development model that is even challenged in the West has any chance of working in a country where 25% are below the poverty line and 35% are illiterate.

The Indian Dream

The Indian dream does not exist - for 80% of us, survival is the dream. Instead of acknowledging that, our middle class is sufficiently brain washed as to actually support policies and practices that are against its own class interests. Let me repeat this - most of us have little chance of becoming the next Narayana Murthi. There is nothing wrong in supporting policies that will actually help our class, instead of "labor reform".


Destination Infinity said...

The money the government invests for the SEZ in terms of roads, trains and other infrastructures are helping the employees of the SEZ more than the owners. The employees are also paid good salaries. If the SEZ had not happened, so many of our youth would have been un-employed.

There is one thing though, where there is more money flowing, the standard of living and the prices of land, commodities etc raise immediately, hence neglecting any hopes of better standards for the poor people. This does increase the gap between the rich and poor people drastically.

Destination Infinity.

Ramiah Ariya said...

Is it really true that if business owners do not pay taxes, they employ more people and pay them more? I think you are taking a very charitable view. The truth is that these same arguments could be used by EVERY business out there, not just IT. Yet most businesses pay taxes and still expand. There is a good reason for paying taxes.
I find the claim that businesses will not expand if taxes are being paid very strange and against the common operations in most other countries in the world. Why don't we give a complete tax break in that case? Why bother taxing anybody?
By the way, arguments such as these were made for relaxing environemntal and labor standards in Philippines. The claim was that businesses would not operate under such "constraints". There was a study at one point and this was found to be untrue - businesses do learn to adapt and flourish with reasonable constraints.

Of course, business owners DO claim otherwise - but there is no surprise about that.

Maheswari said...

Hi Ram - I think you are not looking at the whole issue from economic perspective. To get data on SEZ contribution click the below URL:

Also, please note in some cases a consortium is formed for funding and not from tax payers money

I dont find any reason why SEZ shouldnt exist. The initial thrust is required for any new thing - let it be Ideas, biz or social initiatives. In earlier years Agri was pampered [BTW it is continued even now], then came Industrial era,then Small scale industries, now IT tomorrow it is going to be Bio related things including pharma. This thrust is to propel the momentum and ensure that it gains self sustaining speed and mechanism to guide itself. This is evident from this budget where SW industry and Garment industry is not given any considerations inspite of US economy problems and well known fact of its positive correlation with the operations of these industries. The reason for this is because they know that these industries has matured and it has mechanism to overcome problems by itself.

The next thing i like to dispute is your perception that it is an illusion that Govt is not doing anything for poor. The Govt is striving for "Inclusive Growth" which prevents that poor gets poorer. But the problem is with PEOPLE - They dont accept right things like kids refusing to take medicines just because they are sour. For eg. look at the farm loan waiver - it is whopping Rs.60000 crore!! I am not against this waiver but strongly restrain the way the waiver is disbursed. The Govt has announced all bank loans will be waived off - Why Govt has not mandated that lands which are covered by insurance alone can qualify so that it will act as a mechanism to implement insurance in Agri which will result in streamlining the whole agri sector in near future. This would help the society, economy and govt since insurance will take care of all losses[as per ethical biz priniciples] and implements best practices in agri. If this was done I will whole heartedly welcome this move but instead of that a blanker waiver is ridiculous and the apparent reason for doing it is - Vote Bank. The public instead of thinking in right way they are now demanding for waiver for loans taken from moneylenders which shows the height of absurdity! So the fault is with people and Govt machinary and not Policies.